On Dec. 9, 2020, DoorDash (NYSE:DASH) stock started trading on the New York Stock Exchange and closed up more than 85% in its debut, giving the company a market valuation of approximately $60.2 billion.
Year-to-date, DASH stock is up 13.1%, trading at more reasonable price multiples than February highs.
DoorDash’s current market price is too high for several reasons. The delivery market is very competitive, and the company was loss-making last year and is only expected to barely break even this year on an adjusted basis.
For all these reasons and more, it is better to let DASH stock lose steam. At a discount, shares of the online food ordering and food delivery platform can be worth a small position in your portfolio. But not at current rates.
DASH Stock: A Classic Pandemic Play
DoorDash revenues tripled last year, but its performance during last year’s crisis is not astounding.
People increasingly opted for food delivery services as they sheltered at home through the novel coronavirus pandemic.
However, now that the economy is whirring back and people returning to sit-down restaurants, DoorDash’s prospects are less bright.
Interestingly, DoorDash does not think so. In May, the company reported excellent operating results for the first quarter of the year, lifting its guidance for gross order value to between $35 billion and $38 billion from $30 billion to $33 billion previously.
Whether the company can reach that number will have to be seen. But even with net sales increasing 198% to $1.08 billion, topping expectations of $993.3 million, the operating loss came in at $99 million, marginally improving from $123 million in Q1 2020.
Chalk it up to a competitive delivery market with few ways to differentiate the major players. There are no switching costs, and customers are just looking for the app that will give them the lowest cost.
DoorDash does deserve credit, though. It has diversified its revenue stream, which puts it in a different light from its peers.
The company charges restaurants a commission based on the total dollar order value and also charges a fee to consumers for using its platform.
More interestingly, though, the company operates DashPass subscription service, which charges per-order fees to merchants that utilize its logistics to service orders under its Drive third party program.
Now you might be thinking DoorDash could be the next Tesla (NASDAQ:TSLA). In the last five years, TSLA has outperformed the S&P 500 by 1165% and its sector by 1121%.
So, clearly, even if a stock looks overvalued, you can end up making a nice return on your investment.
Sales more than tripled last year to $2.9 billion, and the top line has grown about 200% each year between 2018 and 2020.
During the same period, growth rates of about 34% for Uber, 85% for Lyft, and 39% for Grubhub were recorded. However, prospectively, things are expected to slow down considerably.
According to consensus estimates gathered by Refinitiv, the top line of DoorDash is expected to grow by 45.4% and 76.0% in fiscal 2021 and 2022, respectively.
For Uber, analysts expect top-line growth of 42.20% and 99.3%, and for Grubhub, the 19.50% and 38.70% in fiscal 2021 and 2022.
DoorDash has innovated and has been quick to spot trends in the fast-growing delivery space, concentrating on suburban markets, for example.
But as people return to restaurants, demand for delivery will become sluggish, impacting revenues and profits. So, revenue and profitability targets for DoorDash will become hard to achieve.
In addition, DoorDash’s long-term margin prospects are uncertain, considering it operates in the relatively low margin restaurant business, with its labor cost increasing alongside order volumes.
When you take all these factors into account, DoorDash’s valuation seems a bit far-fetched, especially when you compare it to Uber, which offers diversified revenue streams at a discount.
The Bottom Line on DASH Stock
There is much to like about DoorDash. It has performed excellently during the pandemic, and its asset-light model is not to be taken lightly. However, it operates in a very competitive market with razor-sharp margins.
On top of it all, the major impetus of its recent success, the pandemic, will become a thing of the past very shortly. Under these circumstances, the valuation is a bit frothy, in my opinion. As a result, DoorDash can become an interesting bet on a correction.
Until that happens, Uber stock is a better option if you want exposure to this space. That should give you more bang for your buck while you wait for DASH stock to cool down.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio. Faizan does not directly own the securities mentioned above.